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Crisis hits Dubai may effect all other businesses

Boom turns to gloom as crisis hits Dubai

DUBAI (Reuters) - The seaside emirate of Dubai shifted into crisis mode this week as its breakneck building boom stalled, its lending bonanza evaporated and the government pondered wider steps to rescue banks.

Dubai -- self-styled bling capital of the Middle East, nightclub hotspot for the teetotalling Gulf and home to the world's tallest building and biggest mall -- has gone pear-shaped.

"It's gotten pretty ugly out there," analysts at Nomura Investment Banking wrote in a note this week, describing Dubai's property market as "a full-scale frenzy in which speculation went largely unchecked until it was very late."

The result may be a new business model for the emirate, one based less on debt and speculation.

Dubai's response is now being hammered out by a committee of business and government leaders charged with steering the emirate through the crisis and perhaps throwing its high-debt business model out the window.

Big developers have started firing staff and paring projects, banks like Emirates NBD ENBD.DU have blocked consumer credit to employees of companies at risk, and at least one major mortgage company has stopped lending altogether.

"Lenders blinded by rising oil prices and borrowers spellbound by easy returns have helped build a mountain of private sector debt in parts of the region that has generated an illusion of excess and abundance," Nomura said.

Now, investors fear that individuals and corporations alike will have trouble paying back Dubai's non-bank foreign currency debt estimated at just under $70 billion, according to estimates by ratings agency Fitch.

Shares in the region have lost around $1 trillion since the beginning of the year as investors fled. The UAE finance ministry said last month it would inject 70 billion dirhams ($19 billion) into the banking system, and is already looking at doing more to keep interbank liquidity flowing.

Many had hoped that the six countries of the Gulf Cooperation Council (GCC) would escape the crisis due to their massive current account surpluses from energy exports.

"Dubai is the most vulnerable, as it has little oil and has been booming on the oil surpluses from the GCC, Iran and Russia," said analysts at Citibank this week.

DUBAI INC.

Dubai Inc. -- the name applied to the emirate because it is run more as a business than a state -- now faces a major overhaul and has taken on teams of consultants to advise on how it might reshape itself in an era of weaker credit, rising competition, falling speculation and narrower profit margins.

With barely any oil to call its own within the loose UAE confederation, Dubai made its bid for fame by housing banks, retail, media, shipping and logistics enterprises and by billing itself as a safe haven in a volatile region for investors.

Post-crisis, banks and property firms are likely to merge, developers retrench, and the wild culture of speculation grow tame.

"The solution is a comprehensive effort to consolidate the myriad of companies that make up Dubai Inc.," Citibank said.

In addition, some suggest that the monetary regimes in the Gulf -- all, except Kuwait, which peg their currencies to the dollar -- may need to restructure as floating regimes instead, a move likely to spur decades-old goals of monetary union.

Few anticipate default given the widespread view that Dubai is too big to fail and the implicit support provided by its neighbor Abu Dhabi -- home to the largest sovereign wealth fund in the world, ADIA.

"We believe Dubai will pull through with some help," Citibank said.

But with the cost of credit for the Gulf's top 22 financial firms rising from 30 basis points over LIBOR in early 2007 to around 200 now, many expect Dubai's spree to halt, plans to be swept from the drawing board, and existing projects to struggle.

The result, in the end, may be the sustainable growth model that Dubai has sought all along.

I feel that this crisis may not last long. Dubai is the most significant country in Middle east and feel that it's neighbours may help it in restoring it's economy.

Neighbors are of absolutely no help in such matters mate unless they see their own profits.
Looks like U.S. and some other Western countries' investors are the ones who will suffer the most.
Below are some quotes i picked from some news websites about the Dubai Economic crisis.

Dubai, an oasis in the Persian Gulf, has woken up to a debt crisis of its state-owned investment flagship Dubai World, a firm known for its slogan -- "The Sun Never Sets on Dubai World."

The state-owned conglomerate in the United Arab Emirates Wednesday asked for a delay in repaying some of the 60 billion U.S. dollars it owes to creditors, causing panic and concerns across the world.

Likewise, many heavyweight investment institutions also cast doubts on the current default by warning that the Dubai debt might be over 80 billion U.S. dollars. Some observers even dubbed this scenario "financial crisis 2."

Half of all the UAE's construction projects, totalling $582bn (£400bn), have either been put on hold or cancelled, leaving a trail of half-built towers on the outskirts of the city stretching into the desert.

anks have stopped lending and the stock market has plunged 70%. Scrape beneath the surface of the fashion parades and VIP parties, and the evidence of economic slowdown are obvious. Luxury hotels are three-quarters empty. Shopkeepers in newly-built malls are reporting a drop in sales. In Dubai you expect to see a Ferrari parked beside a Rolls-Royce. But not, as is the case now, with scruffy For Sale signs taped to the windows.

Doesn't look too good. Anyways, due to lessons learn't from last year's economic crisis, this one shouldn't be too bad either to overcome.

The impact of it is not as serious as those in the US so don't need to worry.

This goes beyond the US. The low interest rates in the US and Japan are fueling a "carry trade" and inflating investments in the emerging markets. Just the other day the debt ratings for Spain and Greece have been downgraded.